EU can help Greece by exiting the eurozone

by Richard A Werner

Special to The Daily Yomiuri (May 15 2010)


In my article on Greece and the eurozone on Saturday, I pointed out that the euro should not have been created in the first place: Europe already had a functioning and trusted currency, the German deutsche mark, while each country could pursue its own monetary policy as suited its needs.

Nowadays, one often hears the call that Greece should be kicked out of the eurozone. Would this be a useful response to the current crisis? It would take the pressure off Germany as EU paymaster, and off Portugal and Spain as the next dominoes to fall after Greece. But it would not help Greece: To the contrary, as Greek debts are denominated in euros, reintroducing the Greek drachma would turn its liabilities into foreign currency-denominated external debt, which it would find even harder to service, as the drachma would immediately weaken against the euro. Default on euro bonds would follow, and contagion could hit other countries in the eurozone.

It turns out that the solution to Greece's problems in particular and the sovereign debt crisis in the eurozone in general is simple. European nations - especially Germany - must now pull together, show solidarity with Greece and act in unison: Member countries should do the sensible thing, and all exit the eurozone. This would have to be done simultaneously with a compulsory exchange of all bank deposits into local currency at the original euro conversion rate. After this one-off transaction at a fixed exchange rate, each currency would start to float.

This simple step would solve the European sovereign debt problem - and not only that of Greece - in one stroke: While all national debt would become external debt denominated in a foreign currency (the euro), this euro would be without the backing of any economy. It would collapse, reducing the local currency value of euro debt to virtually zero.

Effectively, the Year of Jubilee would be called: All eurozone national debts would evaporate - without any default. Greece's sovereign debt problem would be solved, as would that of Portugal, Spain and Ireland. And even the national debts of France and Germany would no longer exist. Taxpayers in all eurozone countries would benefit as they never have before. Taxes could be lowered. Public spending could be boosted all over Europe, for instance, on national health insurance, medical care and generous pension systems. Free, high-quality education for all could be introduced and maintained across the eurozone. Governments would have enough money to tackle the important challenges of the day, such as climate change and demographic problems - instead of wasting decades on a misguided and dangerous project to create the United States of Europe (which was concocted by the US Office of Strategic Services, the Central Intelligence Agency's predecessor).

There has to be a catch, some readers might feel. True, European banks are one of the largest holders of euro government bonds. Many such institutions would become technically bankrupt and insolvent (once again) as a result.

But we are quite used to this state of affairs by now, and in addition to suddenly having ample fiscal leeway to sort out the banks in each country, with the re-establishment of national central banks a much cheaper and more efficient method could be used to restore healthy banking systems.

How did the Fed keep the US banking system afloat?

It used the central bank's power to rewrite balance sheets and bought their nonperforming toxic assets - at prices closer to face value than market value. This is what I had advised the Bank of Japan to do since 1994. So banks could easily be bailed out at zero cost to the taxpayers.

Nations would once again have control over their economic destiny by possessing the most powerful economic tool, monetary policy.

Each country could ask its central bank to purchase the euro-debt from its banks and thus recapitalize the institutions at zero cost to anyone. Banks would immediately have strong balance sheets. Since the national central banks have continued to exist (but have had to dance to the European Central Bank's fiddle), no extra investment in central bank infrastructure and staff would be required.

As part of the switch back to national currencies - the deutsche mark in Germany, for instance - governments could impose price controls, so that businesses would not be able to rip off consumers again (as they did upon the introduction of the euro). In Germany, for instance, prices could be fixed at their euro levels: After all, when the euro was introduced, prices also remained unchanged (amounting to a doubling of real prices, or 100 percent inflation - which central banks and statistical agencies worked hard to hide). In effect, Germans would receive the half of their savings back that was confiscated by the currency reform of 2002, when the euro was introduced.

There would be many further benefits. With central banks restored to nation-states, the public privilege of creating the money supply could once again be put to proper use by employing it only for productive activities. Credit creation by commercial banks and the central bank would be banned if it was to be used for unproductive purposes. This includes credit creation for asset transactions. These are the source of the boom-bust cycles and the recurring banking crises. Credit creation for productive purposes would be encouraged. Through this one regulatory measure - to ban bank credit creation for asset transactions and limit bank credit creation to productive use - an era of low unemployment, stable growth and an end to boom and bust cycles could be ushered in.

After the exit from the euro, the next step should be to downsize the Brussels bureaucratic aristocracy (an unelected elite making decisions without accountability). The hundreds of millions saved in tax-free salaries of overpaid and underworked bureaucrats in Brussels would furnish fully paid pension systems and medical care for aging Europe, including for the decades when the younger Eastern Europe begins to age.

Actually, the aging problem itself could then be solved: The dearth of children is largely due to government policies that discourage parents from having children. There is nothing as productive as bearing and rearing children. For the birth of each child, parents should receive the equivalent of $200,000, created from scratch by each national central bank. This would be noninflationary, as people are the source of productivity and growth. Birthrates would shoot up in no time. Later historians would puzzle why Europe ever thought there was a terminal demographic problem.

Meanwhile, the worthless Eurobond certificates could be framed beautifully and used to decorate the central banks's hallowed marbled hallways as well as those of the oversized Brussels buildings that currently house the European Commission, saving the taxpayer a lot of money on otherwise expensive art purchases. Soon after, the Brussels buildings could be turned into an educationally valuable Museum of Bureaucracy - a kind of memorial place to learn from the horrors of the past - as European countries learn to trust and appreciate each other again by reverting to an open free trade area without having to obey unelected Brussels bureaucrats. Democracy would have a chance to flourish once again: Voters would see that national politicians are back in charge.

The inventors of modern interest rate-based banking would approve of this proposal. Already, almost 5,000 years ago the Babylonians thought regular debt cancellations were essential to avoid the fundamental problem of compounding interest and fractional reserve banking: they create unsustainable debt mountains that cause economic crises and wealth disparities.

Today we know they are also at the root of the bias toward excessive, environmentally destructive economic expansion. Why have we copied money-creating banking and compounding interest from Babylon, but not its policy of debt cancellation, which was thought necessary in such a system? Instead of debt cancellation, which is transparent, we have financial and banking crises every few decades. This is a far less transparent process. It also accelerates the problem the Babylonians wanted to counteract, namely the increasing concentration of wealth and power in the hands of the few.

Finally, what about the individual investors who might lose money on their euro government bonds, if the euro is ditched?

First, there are not that many of those, because governments have encouraged individual investors through various regulatory and tax incentives to pile into the much riskier stocks instead. And stock prices are likely to rise after an initial shock. But even if someone were to lose money on investing in Eurobonds, I suspect many will think it is well worth those losses to have their own national currency back and see the last of the fat-cat Brussels Eurocrats.

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Werner is chair in International Banking at the School of Management, and director of the Centre for Banking, Finance and Sustainable Development at University of Southampton. He is author of Princes of the Yen (M E Sharpe, 2003) and in 2003 was selected as "Global Leader for Tomorrow" by the World Economic Forum in Davos.


Bill Totten http://www.ashisuto.co.jp/english/index.html